Strictly monitoring the Statutory Liquidity Ratio (SLR) to be maintained by all banks, the Reserve Bank of India has been using one of the age-old monetary control mechanisms, almost since its inception. In the Second Bi-monthly Monetary Statement of 2014-15, Governor of Reserve Bank of India has “reduced the SLR of scheduled commercial banks by 50 basis points from 23.0 per cent to 22.5 per cent of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight beginning 14 June, 2014.” By this gesture, the lendable resources of the banking system would be increased by about Rs 40,000 crore.

Reserve Bank of India has been empowered to use the SLR mechanism to impound up to 40 per cent of the demand and time liabilities – namely total deposits - of commercial banks. At one time - in September 1990- it was as high as 38.50 per cent. Banks have become over the years a captive source for investing in government securities whenever the SLR is raised. Spendthrift state governments easily raise funds through this process from banks and they are euphemistically called public debt. A gradual reduction in the SLR is desirable to curtail deficit financing in state budgets. Similarly it is necessary to examine the need for stipulating a more reasonable level for Cash Reserve Ratio (CRR). The central bank can raise it up to 15 per cent, if required. In the past, when bank failures were common, a high CRR was an expedient safety measure. It was 9 per cent in 2008. It has been gradually brought down to 4 per cent at present.

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